The Duty to Defend Is Not Always Broader than the Duty to Indemnify

Courts frequently observe that a liability insurer’s “duty to defend is separate from, and substantially broader than, its duty to indemnify.” If a policy’s indemnity language is broader than its defense language, this common observation is only half right, as the Washington Court of Appeals recently demonstrated in Gull Industries v. Allianz, et al. Defense coverage is obviously narrower than indemnity in insurance policies that do not provide for defense at all. More interesting, however, are those situations where the duty to indemnify is broader than the duty to defend. The Gull Industries Court correctly relied on policy language to separately define defense and indemnity obligations.

The underlying claim for defense and indemnity in Gull Industries involved an environmental cleanup at a gas station in Sedro-Woolley, Washington. Gull sued seeking coverage under policies that indemnified for “sums which the Insured shall become legally obligated to pay as damages” and provided defense coverage for “any suit against the Insured seeking damages . . . even if any of the allegations of the suit are groundless, false or fraudulent[.]”

Washington’s Model Toxics Control Act has a strict liability regime for environmental cleanups. An owner of contaminated property is liable for cleanup costs, and may have no opportunity to litigate the few available liability defenses until after the cleanup is completed. Washington maintains a voluntary cleanup program, which allows property owners to obtain an opinion from the Department of Ecology advising if the property owner’s cleanup, conducted without oversight or input from regulators or the public, is sufficient. Washington Courts have long held that liability for cleanup costs is so certain, and the opportunity to litigate or dispute such costs is so remote, that amounts reasonably spent in such “voluntary cleanups” are costs a policyholder is “legally obligated to pay as damages” even in the absence of a lawsuit or formal judgment.

The policyholder in Gull Industries notified the Washington Department of Ecology of significant contamination at its property and proposed a “voluntary cleanup” thereafter. While Ecology acknowledged receipt of Gull’s various communications, it never named Gull as a “Potentially Liable Party” under the Model Toxics Control Act.

The policyholder in Gull Industries started from the notion that it had covered indemnity costs, and argued that defense necessarily followed from this fact because “the duty to defend is broader than the duty to indemnify.” The insurer began with the proposition that the duty to defend is “separate from the duty to indemnify” and that the scope of the duty to defend was defined by the language of the policy.

The trial court granted partial summary judgment to the insurers, holding that, regardless of whether indemnity coverage existed, there was no duty to defend because there had never been a “suit” against the policyholder. The Court of Appeals agreed, noting that the duty to defend should be analyzed separately from the duty to indemnify, and holding that “an agency action must be adversarial or coercive in nature to qualify as the functional equivalent of a ‘suit.’”

The Gull Industries decision will not be the last word on coverage for environmental costs in Washington. Policyholders and insurers will now need to determine exactly what defense and indemnity costs are in advance of agency action, and which agency actions are sufficiently “adversarial or coercive” to trigger a duty to defend.